Michael Bowen oil and gas groups offer an almost limitless menu of helping services to the oil and gasoline industry. Examples consist of transportation, transport and logistics groups, pipeline organizations, construction and rigging agencies, drilling and refining hardware and device manufacturers, refiners, and plenty of others
1. Michael Bowen Oil and Gas
Discussion Materials
1
Oil and Gas Drilling Investment
2. Table of Contents
2
Section 1 Executive Summary 3
Section 2 Industry Overview 4
Section 3 Company Overview and Positioning 8
Section 4 Valuation Analysis 13
Section 5 Questions 21
3. Executive Summary
3
The Oil Drilling and Gas Extraction industry will benefit from strong
global demand and rising prices despite high exploration risks
Evolution Petroleum Corporation (EPM) possesses a solid asset base with
a unique strategy and innovations to pose a competitive advantage
We value the company at about $9.19 per share
We recommend placing Evolution Petroleum Corporation on the Watch
List so future analysts can evaluate its changing risks and growth
strategies
5. Industry Overview
Oil and gas extraction is a mature, stable market in the
United States
Trends include rising global demand from emerging
economies, increased crude oil output from offshore
drilling, increased natural gas production from new
fields, and pressures from regulations and alternative
energy growth
New technologies have allowed increased exploration
of previously unattainable resources
Price volatility and high capital costs continue to
threaten smaller industry players
5
Industry Trends
The oil and gas extraction industry benefits from rising oil and gas prices and strong global demand
Sources:
1. Deutsche Bank Markets Research. “Oil & Gas for Beginners.” 25 January 2013.
2. Credit Suisse. Oil & Gas Primer. September 2011.
3. IBISWorld Industry Reports.
Oil Demand Correlation with Real GDP Growth (1969 – 2008)
Industry Composition
The oil and gas drilling and extraction industry is worth
$319.5 billion in the United States
Crude oil makes up 58.4% of the market while natural
gas represents 41.6%
The United States sends 59% of its oil and gas exports
to Canada and 19% to Mexico
Texas, Oklahoma, and Louisiana contain the largest
amount of industry output and revenue in the
continental United States
59.3%18.6%
11.1%
9.3%
1.0% 0.7% Petroleum refining industry
Natural gas distribution industry
Utilities
Industrial users
Oil exports
Gas exports
U.S. Oil & Gas Drilling and Extraction Market Segmentation
6. Industry Overview
6
Competitive Landscape
Low concentration due to high geographic dispersion
Top four competitors account for 28% of industry
revenue
Economies of scale resulting from large oil and gas
deposits help competitors spread high capital costs
Largest players practice downstream vertical integration
to guarantee buyers
Stringent regulations threaten large and small
competitors and increase capital requirements
Dominant Players in Oil & Gas Drilling and Extraction
Sources:
1. Deutsche Bank Markets Research. “Oil & Gas for Beginners.” 25 January 2013.
2. EIA 2014 Report.
3. IBISWorld Industry Reports.
8.2%
7.7%
6.1%
5.8%
72.2%
ConocoPhillips
Chevron Corporation
Royal Dutch Shell PLC
BP PLC
Other
U.S. Production of Crude Oil
The oil and gas drilling and extraction industry features regional dispersion and high revenue volatility
Price Determinants
Prices remain volatile due to changes in supply and demand
Global economic recovery increases transportation and
industrial energy demands
Different grades of oil (heavy, light) typically attract
different prices with lighter oils earning a premium since
they are easier to refine
Impurities also affect the price of oil with sweet oils, or
those with a low sulfur content, commanding a premium
High barriers to entry result from security and regulation,
capital investments, and the high risks associated with
exploration
7. Porter’s Five Forces
7
Sources:
1. Deutsche Bank Markets Research. “Oil & Gas for Beginners.” 25 January 2013.
2. EIA 2014 Report.
3. IBISWorld Industry Reports.
The oil and gas drilling and extraction industry is attractive with the potential for long-term profitability
Bargaining
Power of Buyers
•Few available
substitutes
•Price volatility
can deter
buyers
Bargaining
Power of
Suppliers
•Low
concentration
of industry
players
•Critical
commodity
product
Entry of New
Competitors
•Economies of
scale
•High capital
requirements
•Stringent
regulations
•High risk and
volatility
Rivalry Among
Existing
Competitors
•Limited oil
fields and gas
reserves
•Smaller firms
may share
buyers
•Larger firms
vertically
integrate
Threat of
Substitutes
•Low use of
alternative
energies
•Oil and gas
serve separate
markets
LOW MEDIUM LOW HIGH LOW
9. Evolution Petroleum Company (EPM) — Company Overview
9
Firm Overview
EPM is a petroleum company engaged primarily in
acquisition, exploitation and development of properties
for the production of crude oil and natural gas
Differentiates through innovative proprietary technology,
reliance on unconventional drilling techniques, and
exploration of previously uneconomical reserves
Management and employees own 21% of shares
Market capitalization of $414 million in 2014
Primary Asset Locations
The company has attractive investments and dedicated management that could sustain future growth
MS Lime
Giddings Field
Delhi Field
Customer Relations
EPM sells commodities so purchasers retain little buying
power in the long term
Purchaser 2013
Plains Marketing L.P. 90.0%
Enterprise Crude Oil LLC 4.0%
Flint Hills 2.0%
DCP Midstream, LP 1.0%
Kinder Morgan 1.0%
Enervest, LLC 1.0%
Orion Exploration Partners, LLC 1.0%
Revenue Growth
10. Evolution Petroleum Corporation (EPM) — Company Overview
10
Enhanced Oil Recovery
Increase the production and recovery of oil and
natural gas
Enhanced Oil Recovery from the Holt Bryant Unit in
the Delhi Field in Louisiana
Purchased in 2003 for $2.8 million
Operated by Denbury Resources, Inc.
Owns 7.4% interest and 23.9% revisionary
interest
EPM earns money through Enhanced Oil Recovery, Bypassed Primary Resources, and Unconventional Development.
Carbon Dioxide Oil Recovery at Delhi Field
Bypassed Primary Resources and Unconventional Development
Focus on horizontal drilling
Mississippi Lime, North Central Oklahoma
GARP Artificial Lift Technology
11. SWOT Analysis
11
Evolution Petroleum Corporation’s reliance on innovative technology and alternative production and exploration
methods differentiate it from the competition and provide a foundation for future growth.
Sources:
1. Company website.
2. EIA 2014 Outlook.
Strengths Weaknesses
Proprietary GARP Artificial Lift technology and patents Depends on a few large clients
Rich in assets and proved reserves Depends on crude oil for revenues
Generates scalable reserves potential at a low unit cost with long-term growth
potential
No presence in growing global markets
Experienced, trained management team with deep experience in innovative oil
and gas exploration and production strategies
Relies on third party operators, marketers, and
technologies
Royalty and interest contracts reduce risk and increase revenues Light debt use may limit exploration opportunities
Opportunities Threats
Delhi Field previously produced millions of barrels of oil indicating future
success
Exposure to commodity risk stemming from changing
world prices of oil and gas
GARP technology provides licensing opportunities Cyclicality of end markets
Increased demand from transportation and industrial sectors Uncertainties inherent in reserve estimations
Cash reserves can help secure future investment opportunities Increased competition from large, vertically-integrated
peers
Increased push for domestic energy output could spur demand Price-elastic, highly competitive environment